Given its status as a critical public utility, telecommunications has been regarded as an integral part of a country's sovereignty and thereby subject to foreign ownership restrictions under either telecommunications legislation or a country's foreign investment law. However, largely as a result of liberalization, many countries have eased foreign ownership restrictions in order to attract investment, particularly as public sector financing has shrunk since the 1980's and the private sector, both domestic and foreign, has had to assume responsibility for financing development in the ICT sector.1 Foreign investment has facilitated the growth and development of the telecommunications sector in many countries, increasing access to capital for network development and modernization, and allowing for the transfer of technology and know-how. However, despite the benefits of foreign investment, not all countries are initially open to establishing a legal environment that is conducive to overseas ownership in the sector (see Box 3-10 below). Where foreign ownership restrictions continue to exist, governments should balance the reasons for such restrictions with the need for creating a favourable environment that is conducive to competition and development as well as an adequate access to capital.
Box 3-10: Vietnam's Business Corporation Contracts
Under Vietnam's investment law of 1992, as amended in 2000, foreign companies are allowed to provide services to Vietnam's telecommunications market only under a Business Corporation Contract (BCC). A BCC is, in essence, a partnership agreement between a foreign and a Vietnamese party in which private investors provide capital and receive a negotiated return on their investment for a prescribed number of years. Foreign investors are not allowed to own equity stakes in Vietnamese telecommunications companies and the Vietnamese party is the only party permitted to hire and manage a workforce. A foreign company must be present in Vietnam for at least two years before entering into BCC negotiations.
Recognizing that this scheme
discouraged foreign investors because they had no operational control over
their investments, the Vietnamese Government issued a new Law on Telecommunications
and Decree implementing the Law loosening these restrictions. As of June 1, 2011, foreign ownership
restrictions on telecommunications services provided under Vietnam’s market
access commitments in its WTO services schedule apply for other WTO members. For example, for facilities-based basic
telecommunications services, foreign capital contribution may be up to 49% of
the charter capital of a joint venture.
Source: Decree Detailing Telecom Law of Vietnam, Vietnam Briefing (Apr.
2011) at http://www.vietnam-briefing.com/news/decree-detailing-telecom-law-vietnam.html/#more-3531.
The level and nature of foreign investment in a country depends on various factors, such as openness of the market, government policies, infrastructure quality, political and regulatory stability, taxes and tariffs, labor costs, international commitments, and the existing legal framework. In South Africa, for example, foreign ownership restrictions in the telecommunications sector originate from the political history of the region. To address the effects of apartheid, the government's policy of economic reform has been based on economic empowerment, which encourages ownership and significant participation by historically disadvantaged groups.2 In the ICT sector, Sections 35(3) and 35(4) of the Telecommunications Act requires the regulator, ICASA, to promote the empowerment and advancement of disadvantaged groups and women by giving them preference in the award of any licences for up to 30 per cent equity ownership (and sometimes higher).3
Although foreign ownership restrictions have been eased in numerous countries they continue to exist in some countries, even in liberalized economies, chiefly due to concerns regarding national identity and security, economic espionage, damage to law enforcement interception capabilities, and potential for damage to critical infrastructure.4 For example, although India recently raised the foreign direct investment limit in the telecommunications sector from 49 per cent to 74 per cent in order to attract more investment in the sector, it has imposed various conditions on foreign investment to address national concerns which limit the impact of the changes. These conditions state that: (i) the majority of the Board of Directors, including the Chairman, Managing Director and Chief Executive Officer, must be resident Indian citizens; (ii) at least one resident Indian promoter must hold 10 per cent equity in any telecommunications company; (iii) the Chief Technical Officer and Chief Financial Officer must be resident Indian citizens; (iv) no sensitive information relating to subscribers and accounts can be transferred outside India; and (v) the identity of subscribers must be traceable at all times.5
Although a country's telecommunications laws may contain foreign ownership restrictions, it is often the case that other national laws regarding foreign investment in general may impose limitations. Canada and the United States, for example, not only have foreign ownership restrictions in their telecommunications laws, but have national laws regarding foreign investment such as the Committee on Foreign Investment in the United States (CFIUS) review in the United States and the Investment Canada Act in Canada. In the United States, the Committee on Foreign Investment in the United States (CFIUS) review is applied to all foreign acquisitions of U.S. companies to evaluate the impact on national security. If countries have foreign investment laws which require a review of telecommunications transactions and investment, they should ensure they do not become a hurdle that is non-transparent, timely, resource-intensive, and creates uncertainty. On the other hand, the Investment Canada Act provides for the review by the Minister of Industry of any foreign acquisitions in order to ensure a "net benefit" to Canada.
1 Boutheina Guermazi and David Satola, Creating the "Right" Enabling Environment for ICT, Chapter 2 in e-Development: from Excitement to Efficiency, The World Bank (2005), at 4.
2 See ICT Draft Black Economic Empowerment Charter for the ICT Sector, Preamble, May 2005 at http://www.ictcharter.org.za/content/ICTbeecharter04may2005-Minister.pdf.
3 Telecommunications Act 103 of 1996, as amended, 1 July 1997, available at http://www.icasa.org.za.
4 For an interesting article regarding such concerns from the U.S. perspective, see James A. Lewis, New Objectives for CFIUS: Foreign Ownership, Critical Infrastructure, and Communications Interception, 57 Federal Communications Law Journal, 457-478, May 2005.
5 FDI cap in telecom hiked to 74 pc, Business Line, Internet Edition, 3 February 2005, available athttp://www.thehindubusinessline.com/2005/02/03/stories/2005020303080100.htm.